Differential Analysis for a Discontinued Product The condensed product-line income statement for Rhinebeck Company for the month of October is as follows: Rhinebeck Company Product-Line Income Statement For the Month Ended October 31 Hats Gloves Mufflers Sales $64,700 $90,100 $27,200 Cost of goods sold (26,300) (33,000) (14,600) Gross profit $38,400 $57,100 $12,600 Selling and administrative expenses (29,900) (34,600) (14,400) Operating income (loss) $8,500 $22,500 $(1,800) Fixed costs are 15% of the cost of goods sold and 40% of the selling and administrative expenses. Rhinebeck Company assumes that fixed costs would not be materially affected if the Gloves line were discontinued. a. Prepare a differential analysis dated October 31 to determine if Mufflers should be continued (Alternative 1) or discontinued (Alternative 2). If an amount is zero, enter"0". If required, use a minus sign to indicate a loss. Differential Analysis Continue (Alt. 1) or Discontinue (Alt. 2) Mufflers October 31 Continue Discontinue Differential Mufflers Mufflers Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues Costs: Variable cost of goods sold Variable selling and admin. expenses Fixed costs Profit (Loss) Decision to Discontinue a Product On the basis of the following data, the general manager of Hawkeye Shoes Inc. decided to discontinue Children's Shoes because it reduced operating income by $30,000. Hawkeye Shoes Inc. Product-Line Income Statement For the Year Ended November 30, 2018 Children's Shoes Men's Shoes Women's Shoes $280,000 $300,000 $500,000 Total $1,080,000 Sales Costs of goods sold: Variable costs Fixed costs $(135,000) (45,000) $(180,000) $100,000 $(150,000) (50,000) $(210,000) $90,000 $(220,000) (120,000) $(340,000) $160,000 $(505,000) (225,000) $(730,000) $350,000 Total cost of goods sold Gross profit Selling and administrative expenses: Variable selling and admin. expenses Fixed selling and admin. expenses Total selling and admin. expenses Operating income (loss) $(100,000) (30,000) $(130,000) $(30,000) $(45,000) (20,000) $(65,000) $25,000 $(95,000) (25,000) $(120,000) $(240,000) (75,000) $(315,000) $35,000 $40,000 a. Prepare a differential analysis to determine the flaw in the general manager's decision. If an amount is zero, enter "0". If required, use a minus sign to indicate a loss. Differential Analysis Continue (Alt. 1) or Discontinue (Alt. 2) Children's Shoes November 30 Continue Discontinue Differential Children's Shoes Children's Shoes Effects (Alternative 1) (Alternative 2) (Alternative 2) Revenues Costs: Variable cost of goods sold Variable selling and admin. expenses Fixed costs Profit (Loss) Feedback b. What is the flaw in the decision to discontinue Children's Shoes, if it is assumed fixed costs would not be materially affected by the discontinuance? The general manager is not focusing on the differential revenues and costs. V If the children's Shoes are discontinued, the company's loss would increase by $